Money Orgies: Investors Who Love Them, and Entrepreneurs Who Don’t

Tech entrepreneur Dan Martell has some advice for fellow startup founders, and it’s not about how to scrounge up funding. It concerns how to resist funding.

Term sheets come flying these days from all quarters. Martell almost closed a round while kite skiing at an investor-hosted retreat when his advice-brokering site Clarity caught the eye of Charles River Ventures. If the investors and the terms are a good fit, Martell says he is fine with doing deals anywhere, anytime, even from a snow-covered parking lot. But when it comes to taking venture capital, you have to draw the line somewhere, and Martell draws it at money orgies.

“What I’ve seen lately,” says Martell, “is there’s these party rounds that happen where you’ve got like 30, 40 investors, each at $25,000 to $50,000. People have been doing that and I don’t agree with it.”

Martell is against party rounds because no backer is deeply invested in helping a startup succeeding when it “goes out with everybody.” But the fact that such rounds have become an issue is just one example of how good startups have it right now.

Despite the plunge in Facebook and Zynga shares, an oversupply of investors are still clamoring to invest in Silicon Valley entrepreneurs, who now find they can take their pick of backers. Deep-pocketed investors trying to break out from the pack, tout their connections, expertise, and willingness to work hard to be supportive. Some host founders at posh resorts and on globetrotting tours.

For most of Silicon Valley’s history it’s been the VCs who’ve had all the leverage. Entrepreneurs depended on their largesse to fund expensive computer hardware and other infrastructure. But building tech startups, especially software and increasingly hardware, is much cheaper these days as open-source software has proliferated and data center muscle can be rented as needed. Quite simply, the ability to raise millions from investors isn’t the chief barrier to building a company anymore. The routine now is to build a product and a company first and look for money later — sometimes never, if revenue starts flowing. That new dynamic has placed founders in a position of extreme power.

But the money orgy phenomenon, and the broader capital surplus, raise the question of whether the balance of power has tipped too far, and whether private investors, hungry for returns that are hard to come by in bonds and stocks, are piling into the startup world leaving all financial prudence behind.

“Money doesn’t mean as much any more,” says Joi Ito, who has both funded and run tech companies, and now heads up MIT’s Media Lab. “The role of the investor has to be a lot more humble and supportive one. Money is almost like a placeholder for the amount of equity an investor gets by putting tons and tons of work into a company.”

To show much help they can be, some firms invite entrepreneurs on retreats featuring top executives from their portfolio companies. Charles River Ventures stages such retreats in the summer and winter, which is how Martell ended up snow kiting his way toward a deal (“We were having serious conversations,” is all Martell will say). True Venture hosts an exclusive “Founder Camp” and a “True University” for college-aged entrepreneurs. Early-stage fund Venture 51 hosted a founder workshop. Summit Series is more famous for its eponymous VIP retreats than for its accompanying venture fund. Seed funding firm 500 Startups invites select entrepreneurs on 10- to 14-day “Geeks on a Plane” tours of cities in Latin America, the Far East and Eastern Europe. (At least some of the geeks pay their own way.)

“The funding environment in the Valley and New York is probably slightly irrational,” says 500 Startups general partner Dave McClure, and “certainly more likely overpriced than underpriced.” That’s why he’s in Tokyo at the moment scouting for potential investments. He takes heart in the fact that it’s “not crazy stupid out there everywhere” and that the erosion of Facebook shares could, he thinks, eventually scare off early-stage tech investors.

Venture capitalists who don’t want to globetrot have to go the extra mile to distinguish themselves. Martell, who is also an angel investor, says he advises entrepreneurs to ask investors, as a condition of taking funding, “Could you commit to doing lunch once a quarter with three of your other portfolio companies and me.”

Sometimes the best way for an investor to distinguish himself is simply to disappear. Daniel Brusilovsky, an adviser to young entrepreneurs, recounted a recent conversation with a startup founder who gave up two board seats for $7 million in funding and vowed never to do it again. Meeting with his owners was a painful waste of time. That’s an increasingly common view among young founders, Brusilovsky says.

“They’re not seeing the value in giving a big-shot VC who’s been doing it for 30 years, or whatever, a board seat,” he says. “A lot of these investors are 30, 40, 50-year-old guys who are a little bit out of touch. And so what value can they bring?”

Those are exactly the sorts of things any VC would say while trying to responsibly negotiate the investment of other people’s money. But put them on the other side of the bargaining table, and their perspective changes. Venture capitalist Ito recently found himself with three different term sheets from eager prospective backers of a new startup he’s involved with. He ended up judging the candidates on attributes that went way beyond cash. In the end, he picked investors that offered a lower valuation than their competitors. “We just liked the VCs a lot better,” he says. “The investor is still important, but money is less important.”

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